investmenthabits.com

Smart individuals sometimes make silly mistakes with regards to investing. Part of the reason for this, I guess, is the fact that many people do not have the time to learn what they need to know to make excellent decisions.

Don’t Forget to Diversify

The standard stock market return is 10 percent or so, but to earn 10 percent you have to own a broad range of stocks. In other words, you need to diversify.

To make money on the stock market, you’ll need around 15 to 20 stocks in a number of industries. (I did not just make up these figures; the 15 to 20 range comes from a statistical calculation that many upper-division and graduate finance textbooks explain.)

Be Patient

It is important for investors to have patience. There will be many bad years. Many times, one lousy year is followed by another bad year. But over time, the good years outnumber the bad.

They compensate for the bad years too. Patient investors who remain in the market in both the good and bad years virtually always do better than people who try to follow every fad or invest in last year’s hot stock.

Invest Regularly

You may already know about dollar-average investing. Instead of purchasing a set number of stocks at regular intervals, you buy a regular dollar amount, such as $100. If the share price is $10, you buy ten shares. If the share price is $20, you purchase five shares. If the share price is $5, you purchase twenty shares.

To make dollar-average investing work with individual stocks, you might want to dollar-average every stock. In other words, if you’re buying stock in IBM, you have to buy a set dollar amount of IBM stock each and every month, every quarter, or whatever.

Do not Ignore Investment Expenses

Investment expenses can add up fairly quickly. Small differences in expense ratios, expensive investment newsletter subscriptions, internet financial services (such as Quicken Quotes!), and income taxes can very easily subtract hundreds of thousands of dollars from your net worth over an entire lifetime of investing.

Investment expenses can add up to really big numbers when you understand that you could have invested the money and earned interest and dividends for years.

Do not Get Greedy

Individuals make all sorts of foolish investment decisions when they get greedy and pursue returns that are out of line using the average annual returns of the stock market.

If somebody tells you that he has a sure-thing investment or investment strategy that pays, say, 15 percent, don’t believe it. And, for Pete’s sake, don’t buy investments on a shell company or investment advice from that individual.

Do Not Get Fancy

For many years now, I’ve made the better part of my living by analyzing complex investments. Nevertheless, I believe that it makes most sense for investors to stick with very simple investments: mutual funds, individual stocks, government and corporate bonds, etc.

To add to these basic investments, ask an investment expert about merge companies and financial mergers.